Potential for Foreign Direct Investment Activity in China - Essay Example

? Why there may be greater potential for FDI activity in China rather than India under the present economic climate? Introduction India and China arethe largest nations in the world at present in terms of population size. Even though India is under a democratic administration, China is controlled by the communist party for the last few decades. However, when it comes to economic development both India and China have lot of similarities. These two countries are the most rapidly developing nations in the world at present. It is often said that global wealth is currently shifting from less heavily populated regions to the most heavily populated regions because of the developments in these two countries. India and China have shown the world that how the big curse (Population growth) can be turned to big blessing with the help of suitable economic policies. While most of the other developing nations such as America and European countries are struggling to find enough manpower, India and China have surplus manpower which they are utilizing cleverly for economic development. Even though a developing country may have many other sources of external finance, FDI seems to be the largest among all those sources. According to Malik et al.( 2012), “FDI is not only considered as a healthy sign for the overall national economy but also a positive indication for the local industry considering its positive spill over effects” (p.230). FDI is bringing dividends in the progress of India and China in recent times. Majority of the prominent companies have invested heavily in India and China in recent times to capitalise the cheap manpower and other resources. It should be noted that America and European region are not much promising for the multinational companies at present because of the ongoing recession problems and the ill-health of the economies there. On the other hand, India and China offer fertile soil for such companies and they work on their expansion plans based on the prospects in these two emerging economies. Some people believe that the investment climate in China is better than that in India. On the other hand, many others are of the view that India provides better climate than China for FDI. However, considering the recent performances of India and China in economic development, once can definitely say that China has slight edge over India in attracting FDI. This paper analyses why there may be greater potential for FDI activity in China rather than India under the present economic climate. What is FDI? According to Dicken (2007), Direct investment is a kind of investment intended to gain control over the activities of another firm. Moreover, FDI is the investment across nations (p.36). Ietto-Giles (2002) pointed out that “The flow of FDI and portfolio investments across countries generates a very large amount of investment incomes going in the opposite direction” (p.27). In short, the economic progress of a country in the modern era heavily depends on its ability to attract FDI. It should be noted that foreign direct investment is the investment of foreign capital in domestic goods and services. Since the internal resources of a country are limited, the ability to attract FDI determines which way the country is progressing. Adina (2011) mentioned about the training effect of FDI. In her opinion, FDI may help a country to modernize techniques and technologies, increase production and supply of goods, improve quality and competitiveness, create new jobs and grow the quality of life (p. 148). There is a limit for many countries to invest in infrastructure development projects because of various reasons such as budgetary constraints. FDI helps such countries to develop infrastructure with the help of foreign capital even though foreign companies, which bring capital, may exploit some internal resources. While balancing the profit and loss of FDI, profit will exceed the loss and hence most countries try to attract as much as FDI possible. In fact, competition for attracting FDI is huge among international companies. Countries which encourages foreign direct investment will liberalise its existing legal frameworks to bring more investments. In fact, the ability to liberalize determines the progress of attracting FDI. That is why liberalised economies are attracting more FDI than other countries. Why there may be greater potential for FDI activity in China rather than India under the present economic climate? India’s economic development was slow until the 1980’s. However, the Narasimha Rao administration in 1980’s laid foundations for India’s economic progress. The current Indian prime minister Dr. Manmohan Singh was the economic minister in Rao administration. It should be noted that Mr. Singh is primarily an economist than a politician. In fact he was the governor of Indian reserve bank before assuming the post in economic ministry. He is the architect of Indian economic progress. Man Mohan Singh opened Indian economy widely and did everything possible to attract FDI. Even though the government attracted heavy criticisms, especially from the left parties, Mr. Singh continued the liberalization process and the rest is history. At present India is one of the rapidly developing economies in the world. (Chakraborty & Nunnenkamp 2006, p.38) The graph given above shows the progress of FDI in India from 1987 onwards. It is evident that Indian economy developed rapidly because of the increasing FDI from 1987 onwards. However, the investment climates in India is not so good at present because of the problems facing by the current coalition government. In the 1980’s the Congress party enjoyed majority in the parliament and hence they could have taken decisions independently. In other words, the political and economic policies could have been passed in the parliament without much protests because of the majority enjoyed by the Congress led government. However, the case is entirely different now. Current congress led coalition government consists of several small parties with contrasting ideologies. Congress party does not have the necessary majority to pass bills in the parliament. They succumb to the pressure exerted by the small parties and are facing difficulties in sustaining the liberalization process. Small parties, especially the left parties are critical in opening Indian economy freely to FDI. Even though these parties argue that opening up of Indian economy may cause problems to internal security. Such parties believe that FDI beyond certain limits may bring more harm than good. On the other hand, Congress party is trying hard to maintain the progress of liberalisation process. However, lack of majority in the parliament retards its efforts to streamline Indian economy into the right path. On the other hand, China does not have such political constraints in attracting FDI since it is ruled by the single party government. China has opened its economy for FDI in 1978. Since then many international firms have sought to establish themselves in the Chinese market. These firms never bothered about the heavy initial investment and operating cost because of the huge potential of Chinese market view to establishing long term market share. “With vast population and rapid rate of growth and economic and social developments, China is becoming very important arena for the study of international business” (Alon, 2003, p.3). At the same time, it should be noted that Google like international companies forced to stop their operation in China because of China’s tightest censoring policies of information. However, generally speaking, MNC’s show more readiness to invest in China despite the black marks over China in terms of human right violation and tight censoring polices. China is arguably the number one exploiter of globalization even though they were the strongest criticizers of it at the time of its introduction. Chinese administration led by Deng Xiao Peng brought miracles in Chinese economy with the help of FDI. Even though Deng’s predecessors like Mao were adamant in preventing FDI, Deng did everything possible to attract FDI. He realised that it is difficult for China to progress properly without assistance from foreign investments since natural resources were scarce in China. Lieberthal (2003) mentioned the contributions of Deng in developing China as to a prosperous country. In his opinion, Deng was instrumental in opening Chinese economy widely to FDI. Deng succeeded in offering political stability in China(p.123-134). Moreover, the ever growing population size forced Chinese administrators to look for options outside China for economic progress. Gao (2005) has pointed out that Chinese industrial sector has succeeded in getting freedom from the administration because of the huge reformation process undertaken in the economic sectors(p.3). Earlier everything in China was under the control of communism. Communist administrations in the past never allowed even the industrial sector to function freely. Private capital was unimaginable in China in the past. At present China seems to be welcoming private capital from foreign countries more than ever before. The administration is doing everything possible to attract foreign companies. Single window clearances are given for all the business proposals and hence international companies are facing less problems in getting the formalities done to start their business in Chinese soil. However, in the case of India such things are still a distant reality even though the current government is assuring many services to the foreign investors. It should be noted that currently there are plenty of controversies now in India regarding the investment of foreign companies in the retail sector. According to a recent New York Times report, “A long-festering controversy about whether India should allow foreign retailers like Wal-Mart into the country has often been cast as a battle between millions of small shopkeepers and large corporate interests. But in much of the country, the issue often divides Indians as much by age as by their livelihoods”(Bajaj, 2012). The case of China is entirely different. Wal-Mart like retailers has already established their business units in China. In fact, Walmart opened its first stores in China in 1996 (Walmart History 1950 -1990, 2012). It should be noted that even in 2012, Walmart is struggling to establish enough retail stores in India because of strong protests from small domestic retailers. Since the administration has strong control over all the activities in China, nobody will raise even a small finger against the governmental policies. But in India, people has the right to protest against any governmental policies. Many of the political parties in India are against FDI in the retail sector. They argue that domestic retail industry would be destroyed and millions of people become unemployed once Walmart like international giants establish business units across India. Mariana (2011) pointed out that “Potential positive effects generated by foreign direct investments (FDI), such as technology transfer, human capital formation, creating a more competitive business environment lead countries to create an investment climate more attractive to investors” (p.41). President Obama has signed many trade agreements worth more $ 10 billion with India when he visited India last time. The controversies regarding these bilateral trade agreements are still existing in India. Left parties with the help of other small parties are protesting against many of the trade agreements with America including the controversial nuclear deal. In order to substantiate their arguments, they cite the example that “After reaching a new historical record in 2007, 2 trillion dollars as a result of four years of continual growth, foreign direct investment fell in 2008 by 14% at global level” (Mariana, 2011, p.44). The above fact clearly suggests that foreign direct investment is directly proportional with the economic climate in the world - when global economy grows, FDI also grows; when global economy declines, FDI also declines. On the other hand, Chinese administration does not have such fears. The final word comes from the communist administration and hence foreign companies can smoothly enter China once they get clearance from Chinese authorities. MNC’s have lot of growth prospects in overseas countries. They can contribute heavily to the country in which they invest. FDI brings not only growth and development in a country but also it has the potential in developing employment opportunities, fiscal benefits, transfer of technology, knowledge and skills and capital inflows (Primorac & Smoljic, 2011, p.169). It is a fact that MNC’s bring not only the capital but also the employment to a country. However, in order to exploit the services of MNC’s a country should have enough infrastructure facilities. Even though India and China are well equipped with technology and infrastructure facilities, China seems to be having an upper hand. Moreover, labour costs in China is much lesser than the labour costs in India. Thus, China becomes the number one option for the foreign investors now. Djokoto (2012) mentioned that “FDI and trade possess directional implications. The source of this correlation is causality from FDI to trade openness”( p.182). India is reluctant in opening some of the key sectors for foreign direct investment. On the other hand, China is not much controlling the investments in their soil. Indian authorities still believe that exploitation of natural resources may take place if the market opens widely for foreign investors. Bhopal gas tragedy like incidents forced Indian authorities to rethink about FDI. “The control of foreign investment is an important sovereign issue, especially in a country whose history of FDI includes Union Carbide and Bhopal” (A.M., 2011). Union Carbide Company which is responsible for Bhopal gas tragedy succeeded in escaping from severe punishments even though they caused immense damage to life and properties in India. Moreover its CEO Warren Anderson has not surrendered to Indian authorities yet. His argument is that Indian courts do not have the power to prosecute him since he is an American citizen. Coke also caused many problems in India. For example, Coca Cola recently forced to close down its operations in India’s southernmost state Kerala because of the agitations from the local public. Coke tried to exploit underwater resources at Plachimada, Kerala and as a result of those residents near Plachimada experienced huge drinking water shortage (Surendranath, 2004). In short, concerns about the dangers of foreign direct investments are growing in India. Moreover, India’s economy is comparatively more closed than Chinese economy(Khanna et al, 2000, p.67). India is following a mixed economic policy. On the other hand, China is more open towards foreign direct investment. Earlier, China was reluctant in encouraging the takeover of Chinese firm by foreign firms. However, at present they are encouraging foreign firms to take over Chinese firms. (Peng, 2006, p.26). Same thing cannot be said about India. Still foreign firms have many obstacles in taking over any Indian firms. Instead of merger or acquisition, India seems to be more interested in joint ventures. However, foreign firms always like to enter a country with the help of merger and acquisition like business strategies to get complete control over their activities in the target country. United States may lose its status as the world richest country in near future itself. According to McEachern (2009), United States has $ 246 trillion trade deficit at present with China p.275). Many people including economists believe that China may become the number one country in terms of economic development and wealth in near future itself. According to by Albert Keidel (2008), China’s economy will surpass that of the United States by 2035 and be twice its size by mid-century (Keidel, 2008). Moreover, China’s progress towards world’s richest country is much more rapid than the progress of India. Foreign companies consider such things while they take investment decisions. In terms of Inflation rate also, China has upper hand over India. The inflation rate in China was 4.4 percent in October of 2010. Moreover, the average inflation rate in China during the period of 1994 -2010, was only 4.25% (China Inflation Rates, n.d.). On the other hand, inflation rate in India is much higher than that in China. The latest statistics show that India’s inflation rate was recorded at 7.45 percent in October of 2012 (India Inflation Rate, 2012). From the chart given below, it is evident that the inflation rates in India always remain very high compared to that in China. Foreign companies will consider such things while taking investment decisions. (India Inflation Rate, 2012). Mai et al, (2010) pointed out that China’s average GDP growth during 1997–2005, was 8.9%. He has also pointed out that China’s GDP growth may reach 8.9% during the forecast period of 2005–2010 (p.5). On the other hand, UN agency, predicted that the Indian economic growth could be 8.1 per cent in 2011(India's GDP to grow 8.1% in 2011, second only to China: UNCTAD). In other words, India is behind China in terms of GDP growth. Therefore, investors always prefer China first and then only they look for opportunities in India. “Distance between two countries can manifest itself along four basic dimensions: cultural, administrative, geographic, and economic” (Ghemawat, 2001, p.138). India is a country in which religion is a prominent entity. Even though Hindus are the prominent community, the population size of Muslims, Christians and Sikhs like minorities are also significant. Even though people in India are living in harmony, communal riots are taking place occasionally. On the other hand China does not have such problems since religion is not at all a prominent entity there. According to Michael Porter (2000), “Government inevitably plays a variety of roles in an economy. Its most basic role is to achieve macroeconomic and political stability”(p, 26). Indian government is politically unstable compared to the government in China. Since India’s coalition government consists of many parties, its future depends on the decisions of the small parties. On the other hand, such fears are not there for Chinese communist party. Chinese government is much more stable than Indian government and hence investors give preference to China over India. Conclusions China is better than India as far as the climate for foreign direct investment is concerned. Indian government is politically unstable compared to Chinese government. Since religions are a prominent entity in India, communal riots are often taking place in India. Moreover, protests against FDI are more in India than in China. China’s GDP growth is much better than that of India. China is ready to open its market and economy much wider than India does. 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